Economic Environment of Business Lecture Two: Legal structure and objectives of firms

What do we mean by legal structure and why is it important? WHAT? Whether the business is regarded in law as a separate legal entity from its owner(s) or not WHY? Can influence the amount of capital that can be brought into the firm

What determines the legal status?  The amount of finance required  Where to find it  The amount the entrepreneur is willing to risk  Decision making options  Legal obligations incurred

Categorising Firms by Legal Status Unincorporated No legal difference between owner and the firm Owner is responsible for any losses Usually small firms Incorporated  Has a separate legal entity from its owners  Can be taken over, liquidated or sold  Usually larger business

The Sole Trader Highly motivated Flexible decision- making High level of service (No P/A problems) o Size limited to accessible capital o Proprietor is personally responsible for debts o Relies on good health o Long hours o Limitation of owners management skills One person provides the capital, takes decisions and bears the risks

Partnership Easy to form More capital available More knowledge & skills available Share the risks o Personal liability for debts o Limited funds for modern day needs o Partners may disagree o Partnership ends on death “An association of two or more people who are the co-owners of a business run for profit.” Atkinson&Miller, 1997, p17 Task: Why is there a higher percentage of partnerships in the retail sector than in the manufacturing sector?

Incorporated Business The importance of: LIMITED LIABILITY Enables firms to grow! What is limited liability, and how does it enable growth?

Private Limited Companies Limited liability Control by a small group Can survive the death of a member Easier to raise capital o Some setting up costs o Some disclosure requirements o Can be difficult to sell shares o Thus limited ability to raise capital

Public Limited Companies Many shareholders thus access to lots of money Investors can spread their risks by buying shares in different companies Benefits from greater continuity as shares change hands upon death o Expensive to set up o Public information requirements o Subject to take- over o Individual shareholders have little say in the running of the firm Why do you think that PLCs typically employ more staff and generate more turnover than Ltd Cos.?

Why is the organisation of the firm important? It should enable the firm to achieve its objectives: Maximising goals Non-maximising goals These goals should help us to predict output and price

Maximising Goals Profit Maximisation requires owners in control, seeking higher profit Sales Revenue Maximisation related to performance rather than profit as easiest source of extra funds Growth maximisation Can keep both happy - managers seek growth to improve their status - owners want increased capital to increase wealth

Is a single maximising goal likely in practice? NO!!! Strategy is often seen as a process, with influences other than the owner: workers managers shareholders customers All have their own objectives. Typically dominant group changes over time. Thus multi- goals/objectives.

Non-maximising objectives (Behaviourist Approach) Satisficing set minimum satisfactory target level prelude to higher goals Group conflict - coalitions set goals to resolve conflict and to satisfy stakeholders Contingency Theory need to reconcile internal structure of firm with its external environment - constantly changing thus no constant strategy over time

Portfolio Planning Some firms focus on developing: different products at different stages of the product life cycle to maximise future profits existing profit products seen as funds for new products Often seen that a single maximising goal is unrealistic in the modern world. Is it sometimes difficult to identify the owners of a business?

Consider the following Issues: Firm size is often related to executive income Principal (shareholders) often has little control over the Agent (Board of Directors) in PLCs. Sales revenue is usually part of a set of objectives growth via increased asset value to increase status - empire building How can we make the objectives of different stakeholders coincide?

Summary Showed how to categorise firms by their legal status Showed the pros and cons of different legal forms Investigated the objectives of firms and how they might be restricted by the structure of the firm We considered the difficulty of aiming for a single goal

Next Class The Small Firm Sector: Consider the contribution of the small firm sector to the economy Consider the importance on new firms in sunrise industries Consider the problems faced by small firms and the things that can be done to help them overcome them